US taxes up or down? – reflections on the Mid Term Elections

There has been uncertainty all year as to what 2011 US tax rates would look like, with the odds in favour of a rate rise for most of that time. The back drop to this was that the Bush tax cuts are due to expire on December 31 2010 which, in the absence of an extension or new legislation, means a return to the tax rates of ten years ago. In the Green Book proposals earlier in the year, President Obama set out his intentions with regard to taxes, which supported increases for wealthier US taxpayers. 

The Mid Term results have significantly weakened Obama’s position, but was it by enough to mean we no longer need to plan for rate rises in 2011?

Well not necessarily. Importantly, the President retains the power of veto over any legislation put in front of him to sign. It is unlikely that the Republications could get enough votes to override a veto and therefore, (although the Republicans would like to make the Bush tax cuts permanent), negotiations will have to take place. In recent days we have seen the President signal his willingness to talk, with tax topping the agenda at meetings to take place on November 18.

It is still difficult to predict what will happen. If the Republicans and the President cannot reach agreement then the current tax rates simply expire on December 31 and the pre Bush rates are reinstated. This would mean the top rate moving from 35% to 39.6%, with the 15% qualified dividend rate no longer applying. Also the tax on long term gains will rise to 20% from 15%. The main impact is likely to be felt by high earners or people with significant qualifying dividends.

A related impact will be the reintroduction of Estate tax which had disappeared in 2010 – with a top rate of 55% and only $1 million exemption. There is therefore some incentive for Republicans to find some middle ground.

Because of this, we suspect that there may be some increases, although perhaps less widespread than might have been predicted 3 months ago. Planning to mitigate higher taxes next year might include deferring charitable contributions and other itemized deductions for some taxpayers or accelerating them for others; the sale of assets with gains (apart from small business stock) in 2010 rather than 2011 and distributing the profits from hedge funds before December 31. Remember UK tax may still apply and in most cases are likely to still be higher so it is unlikely radical US planning is required for clients fully subject to UK tax.

You can read more about the history of tax cuts and the current debate in the Washington Post, Wall Street Journal or New York Times.

Please talk to your usual contact at Buzzacott if you want to understand more about the possible changes or to review your own situation.